Professional services firms' growth may be constrained by labor availability

Business is picking up for firms that support other businesses, according to the annual survey of professional services firms conducted by the Federal Reserve Bank of Minneapolis and the Minnesota Department of Employment and Economic Development. But these companies are having a harder time finding the skilled labor—accountants, architects, engineers, graphic designers, market researchers, management consultants and other professionals—necessary to meet client demands.

The good news is that more services firms reported growth in sales and profits over the past four quarters than those reporting a decline, and respondents expect this trend to accelerate in the coming year (see chart). Employment also expanded over the past year, according to the balance of respondents, who are slightly more upbeat about the coming year as well.

The bad news for services firms is that more respondents said labor availability is getting tighter, and they do not expect the situation to meaningfully improve in the next year. At least some appear able to deal with tight labor conditions thanks to rising productivity at their firms—something that is also likely contributing to higher sales and profits. More firms reported rising (rather than falling) service prices and input costs, and average wages over the past year increased by 2.7 percent and benefits by an average of 2.4 percent. While more growth is expected in the next year, respondents believe those trends will moderate at least slightly. Respondents from the low-unemployment Dakotas anticipate higher wage increases, while respondents from Michigan’s Upper Peninsula, where unemployment is higher than the national average, reported slower wage growth.

More employers in this sector expect their state’s economy, total employment and consumer spending to increase (rather than decrease) over the next four quarters. While corporate profits are expected to increase across the district, 62 percent of respondents also expect higher inflation, with only 1 percent believing that inflation will decrease.

Increased oil exploration and drilling activities in North Dakota have had a positive effect, as 27 percent of respondents reported higher sales revenue and 11 percent noted higher employment as a result of the oil boom. However, not many have opened new locations or expanded into North Dakota.

Ninth District Professional Business Services Survey Methodology — May 2014

Of the approximately 20,000 Ninth District professional business services firms (most firms in NAICS code 541), a stratified random sample of 2,200 businesses was drawn from the population. For each state, the population was stratified based on employment size; the sample includes 100 percent of establishments with more than 49 employees, 30 percent with 5 to 49 employees and 4 percent with fewer than 5 employees.

A postcard survey was mailed to each of the selected businesses. The mailing was sent in late April, and a second mailing was sent in mid-May to businesses that did not respond to the first mailing. A cutoff for survey responses was June 4. A total of 406 usable surveys were received, for a response rate of 19 percent.

Survey results were tabulated for all professional business services firms. The confidence interval for sampling error was calculated. The 95 percent confidence interval for the results is plus or minus 4.8 percentage points. Results are also subject to errors introduced by other factors, such as the wording of questions and differences between survey respondents and nonrespondents.

Note: The Minnesota Department of Employment and Economic Development produced and processed the surveys for Minnesota firms, and the Federal Reserve Bank of Minneapolis conducted the survey for manufacturers in Montana, North and South Dakota, Ninth District counties in western Wisconsin and the Upper Peninsula of Michigan.